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Price optimisation for insurance

Thinkpiece

Publication date:

07 March 2016

Last updated:

31 October 2018

Author(s):

Policy and Public Affairs, Duncan Minty

Price optimisation is on the rise in UK insurance, driven by the insight that underwriters gain from big data. Yet it is proving a divisive practice, with US regulators increasing banning its use in personal lines markets.

The underwriting practice of 'price optimisation' has opened up a debate about insurance pricing, with the insurance sector facing calls for innovation, as well as accusations of unfairness.

Price optimisation involves the use of non-actuarial pricing factors in setting premiums and in particular, the insight that insurance firms can draw from big data about how much we are prepared to pay for what they have to sell. It's referred to as the price elasticity of demand.

Some people see price optimisation as innovative and customer centric, and replacing underwriting judgement with evidence based precision. Others see it as alienating, unfair and devaluing insurance with its emphasis on price over cover.

Many US insurance state regulators have now banned price optimisation in personal lines insurance, and the National Association of Insurance Commissions has recommended that all state regulators ban it as being unfairly discriminatory.

The Financial Conduct Authority has launched a market study into the use of big data in retail general insurance. Will they follow the US example and introduce a ban on price optimisation here? If so, what steps can UK insurance firms take now to prepare for such an eventuality?

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This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.